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Peter A. Sokoloff & Co. regularly analyzes transactions which occur within the industries covered. An archive of these case studies is kept online as a courtesy to our colleagues. To receive by e-mail new case studies as they are prepared, please e-mail bwalko@sokoloffco.com with your contact information.

Archives > Transaction Case Study 30

Homeland Security Capital Corporation acquires Safety & Ecology Corporation

Dear Colleague,

On March 19, 2008, Homeland Security Capital Corporation (OTC Bulletin Board: HOMS), announced the acquisition of Knoxville-based Safety & Ecology Holdings Corporation (SEC). Under the terms of the transaction, HOMS purchased SEC in a cash, stock, and debt deal potentially valued at approximately $26.4 million. HOMS agreed to pay $20.4 million at Closing and $6 million in an earn out based upon the attainment of performance objectives for 2008 and 2009, payable in HOMS’ common stock.

SEC is an international provider of global environmental, hazardous and radiological infrastructure remediation, emergency response and advanced construction services. Its customers include the United States federal government, the United Kingdom government and commercial corporations in the engineering and construction industry.

SEC was founded in 1991, has approximately 430 employees and annual revenues of more than US $50 million in 2007 with projected revenue in excess of $55 million for 2008. SEC’s trailing 12 months of adjusted EBITDA through February 2008, was approximately $4.3 million. Based on these reported numbers, HOMS paid approximately 4.74x EBITDA and .4x revenue at Closing. If the earn out is made, the price will go to 6.14x EBITDA and .53x revenue.

The transaction is a creative mix of financial instruments, which also generates a balance sheet recapitalization event for HOMS. The purchase price to SEC of $20.4 million is made up of $3.9 million in cash, $3.3 million of newly issued HOMS convertible preferred stock with a 12% accruing dividend due in 2010 and convertible at between 3 and 6 cents a share and notes for $2 million accruing at a rate of 6%. Further purchase price is from repayment of $6.8 million of SEC debt, redemption of $2.4 million of SEC preferred stock and assumption of leases representing a liability of $2.0 million. The SEC shareholders also receive five year warrants to purchase 22,000,000 shares of HOM stock at 3 cents a share.

HOM’s convertible debt holders agreed to convert to a mix of non-convertible debt and a new preferred issue, thus reducing HOM balance sheet debt and increasing equity. The preferred is on the same basis as that issued to the SEC shareholders. Following closing HOM will have approximately $13 million of senior secured debt outstanding.

“With SEC as a platform company, this transformational acquisition establishes HOMS in the environmental services industry,” said C. Thomas McMillen, Homeland Security Capital Chairman and Chief Executive Officer. “Additionally, the combination of SEC’s deep industry knowledge and experience coupled with the proprietary nuclear detection technology of our subsidiary Polimatrix, Inc. (a joint venture with Polimaster, delivering radiation detection solutions) should create significant opportunities for growth and expansion.”

SEC’s vision is to enable its clients to effectively remediate, restore and revitalize contaminated properties; and to assist its clients in maintaining compliance with regulatory and safety stewardship obligations to employees, investors, and the general public. SEC has a history of successful performance and brand recognition in the federal and commercial market for nuclear facility remediation and project completion. Its customers include the United States federal government, the United Kingdom government and leading commercial corporations in the engineering and construction industry.

HOMS is a consolidator in the fragmented homeland security industry. The company is focused on creating long-term value by taking controlling interest and developing its subsidiary companies through guidance of operations and management. The company is headed by former Congressman C. Thomas McMillen. On April 1, 2008, HOMS reported consolidated revenues increased to $12.6 million for the twelve months ended December 31, 2007, as compared to $6.7 million for the comparable period of 2006. The Company’s 2007 operating loss narrowed to $1.9 million in 2007 from $2.9 million in 2006.

SEC became a wholly-owned subsidiary of HOMS following the closing. As part of this transaction, Christopher P. Leichtweis, founder and Chief Executive Officer of SEC, has been appointed President of HOMS and will join the HOMS board of directors.

We hope that you find this feature from Sokoloff & Co. interesting, informative and useful.  We welcome your comments and suggestions.

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